WEALTHY CATERING HOLDINGS LTD v. SUPERIOR LUCK LTD AND ANOTHER

DCCJ 5075 & 5628/2015

(Consolidated)

[2018] HKDC 1011

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO 5075 & 5628 OF 2015

(Actions consolidated by Order dated 9 August 2016)

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JUDGMENT

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INTRODUCTION

1.  This is the trial of a contractual dispute arising out of the operation of a mahjong club called “Joy Luck Club”, and “玉龍軒” in Chinese, located at the Ground Floor of The Commercial Block, Wing Fai Centre, Nos 2-10 Luen Chit Street, Fanling, New Territories.  The ground floor unit was over 8,000 square feet large.  It had about 30 rooms in which members of the club would play mahjong.  There was also a restaurant within the unit.

2.  The club was operated by Superior Luck Limited from October 2011 to September 2015 under a lease of the unit and a franchise granted to it by Wealthy Catering Holdings Limited.  Wealthy Catering itself was granted a lease of the unit and the franchise to operate the club by Appreciate Limited for the same period. 

3.  The club had been in operation before that period.  In other words, when Superior Luck took over the club in October 2011, the club was already up and running.  In addition to the usual business registration, it was a pre-requisite for the club to have in place a proper licence in the form of a certificate of compliance as prescribed under the Clubs (Safety of Premises) Ordinance, Cap 376.  The government department which oversees this is the Office of the Licensing Authority under the Home Affairs Department.  The club licence was issued to Appreciate and was to be renewed annually.

4.  The lease and franchise contract between Superior Luck and Wealthy Catering is one of the two contracts which form the subject-matter of the present actions.  I shall refer to it as “the sub-franchise contract” below. The lease and franchise contract between Wealthy Catering and Appreciate will in turn be called “the head franchise contract”.

5.  Superior Luck is owned by Wealthy Catering as to 30% and Real Stand Limited as to 70%.  Superior Luck was the joint venture vehicle formed by the two shareholders to operate the mahjong club.  The relationship governing the rights and obligations of the two shareholders is the other contract which has given rise to the present actions.  I shall refer to it as “the co-operation contract” below.

6.  The contractual term under the sub-franchise contract expired on 30 September 2015.  Shortly before the expiry, a series of discussion had taken place between Wealthy Catering, Superior Luck and Real Stand, on some occasions involving Appreciate as well.  The content of the discussion is hotly disputed.  That was followed by disagreement, then exchange of letters between the parties’ solicitors and, finally, the issue of writs in these actions later that year.

7.  The disputes concerned various matters, including, most controversially, the renewal of the club licence and the reinstatement of the unit upon the expiry of the franchise.  The upshot was that the mahjong club ceased to operate on about 19 September and on 26 September, Superior Luck delivered the unit directly back to Appreciate.

8.  At the trial there are extensive disputes, both on facts and on law, between Wealthy Catering on the one hand and Superior Luck and Real Stand on the other. 

9.  First, how the sub-franchise contract and the co-operation contract were formed. 

(a)   Wealthy Catering’s case is that they were made in writing only. The former was contained in a one-page Chinese document entitled “承租玉龍軒會所經營協議書” and dated 1 September 2011.  The latter was contained in another one-page Chinese document entitled “協議書” and dated 1 October 2011.  I shall refer to them as “the sub-franchise document” and “the co-operation document” respectively in this judgment.

(b)   The position of Superior Luck and Real Stand is that in addition to the written terms contained in these two documents, the two contracts also comprised oral terms and terms by conduct.  To this, Wealthy Catering says that what was orally discussed prior to the signing of the two documents were either superseded by or sub-merged into the written terms and the oral negotiations did not in themselves form part of the contracts.

10.  Second, the construction of the contracts.  It is worth pointing out at the outset that the documents were apparently “home-made” and not drafted by lawyers.  On the face of them, there are inconsistencies.  Typical in this type of situation, there is therefore considerable room for disagreement on how the terms should be interpreted.  As a separate point, this “home-made” factor clearly forms part of the factual background against which the factual disputes are to be resolved.

11.  And, third, the circumstances in which the sub-franchise of the mahjong club ended.  The rival parties are accusing the other of being in breach of the contracts.

12.  In sum, this is a case where parties disagree on, first, what terms were included in the contracts; second, according to their respective versions of the contractual terms, how they should be interpreted; and, third, on their respective interpretations, whether there were breaches.  

13.  In November 2015, Wealthy Catering issued a writ against Superior Luck under the action numbered DCCJ 5075/2015.  The claim is for breach of the sub-franchise contract, namely default in rent for the month of September 2015 in the sum of $200,000, default in paying electricity charges for the same month in the sum of $29,659 and failure to reinstate the unit to a “bare-shell” state upon its return.  In respect of the last item, Wealthy Catering seeks damages of $686,283.  That comprises the costs of the reinstatement and the rent and management fees payable by Wealthy Catering to Appreciate for occupying the unit from 1 to 19 October 2015, ie after the contractual term, for the purpose of carrying out the reinstatement works.  After giving credit to the two deposits in the sum of $100,000 and $500,000 held by Wealthy Catering under the sub-franchise contract, the total claim amount is $315,942.

14.  In December 2015, Superior Luck filed a defence and counterclaim.  In gist, it denies that it was liable to pay the rent and the electricity charges or that it was under any duty to reinstate the unit as alleged.  In its counterclaim, it says that it was a term of the sub-franchise contract that Wealthy Catering should handle the renewal of the club licence but that it failed to procure an effective licence since no later than 18 September 2015.  Wealthy Catering thus committed a repudiatory breach, which breach was accepted by Superior Luck on 30 September 2015.  In the circumstances, Superior Luck counterclaims the return of three deposits held by Wealthy Catering.  Apart from the deposits of $100,000 and $500,000, Superior Luck also claims that a deposit of $152,000 paid to Appreciate in about 2013 and 2014 should be paid back by Wealthy Catering under the sub-franchise contract.  The total counterclaim amount therefore comes to $752,000.  At the closing stage, it was accepted by Superior Luck that the rent for September 2015 was in fact due and owing.  The amount of the counterclaim is accordingly revised downwards to $552,000.

15.  Within a few days after Superior Luck filed its defence and counterclaim, Real Stand issued a writ against Wealthy Catering under the action numbered DCCJ 5628/2015.  The claim is for breach of the co-operation contract.  It similarly seeks the return of the three deposits in the aggregate amount of $752,000, which is the subject-matter of Superior Luck’s counterclaim.  In other words, Superior Luck and Real Stand are both claiming the return of the same deposits from Wealthy Catering.  Real Stand’s statement of claim in the second action is substantially the same as Superior Luck’s defence and counterclaim in the first action. 

16.  There are therefore three main issues.  I shall refer to them as the reinstatement issue, the licensing issue and the deposit issue below.

17.  By order made by the registrar on 9 August 2016, the two actions were consolidated.  Wealthy Catering was made the plaintiff in the consolidated action and Superior Luck the 1^st defendant and Real Stand the 2^nd defendant, by counterclaim. 

18.  At trial, Wealthy Catering was represented by Mr Adrian But, counsel, and Superior Luck and Real Stand by Mr Michael Chai, counsel.  At the pleading stage, Wealthy Catering raised the issue of whether the solicitors acting for Superior Luck had the standing and authority to defend the claim on the latter’s behalf in the first action, because Wealthy Catering, as its director, had never so approved.  However, the issue has not since been pursued.

19.  Mr Chai stated in opening that in respect of the two competing counterclaims in relation to the return of the three deposits, the defendants’ primary position is that they should be returned to Real Stand.  Alternatively, as a fallback, they should be returned to Superior Luck.

20.  Three witnesses were called to testify at trial.  Mr Man Tim Fat (“Man”), a director and shareholder of Wealthy Catering, gave evidence on its behalf.  Mr Ho Shek Wing and Mr Ho Kin Wah, who are both directors and shareholders of Real Stand, gave evidence on behalf of the defendants.  The Hos are cousins.  For easier distinction, I shall call them by their first names below.

21.  It would be convenient to also introduce at the outset the rest of the dramatis personae who feature in one way or another in the parties’ cases at the time when the two contracts were ongoing.

22.  In respect of Appreciate, Mr Lau Ying Wo (“Lau”) was the chairman of its board of directors and also a shareholder.  Mr Leung Kui Tang (“Leung”), Man’s brother-in-law, was another director and shareholder.  Mr Chui Chi Man (“Chui”) was a representative of Appreciate although he did not appear to hold any formal title.  In his oral testimony (but not in his written statement), Man confirmed that he was a shareholder of Appreciate but he could not recall whether he was also a director.  However, he confirmed that he would handle various matters for Appreciate, as requested by the latter from time to time, although he did not hold any formal work title there. 

23.  In respect of Wealthy Catering, apart from Man, Leung was also a director and shareholder.

24.  What immediately stands out is that Appreciate and Wealthy Catering were clearly related in some way.  There was some overlapping of directors and shareholders between them.  However, the exact relationship between the two companies were not revealed or explored by either side in these proceedings.  Nevertheless, as an objective fact, Man had a role to play in each of these two companies.  This would form part of the factual backdrop against which the case is to be assessed.

THE CASE OF WEALTHY CATERING

25.  Wealthy Catering’s case is as follows. 

26.  The background is to be traced back to a lease dated 1 August 2005 in respect of the unit made between Eastern Group Trading Limited (“Eastern Group”) as lessor and Appreciate as lessee (“the head lease”).  It was for a term of 50 months commencing on 1 August 2005 and expiring on 30 September 2009 at a monthly rent of $120,000.

27.  The unit was used by Appreciate for the operation of the mahjong club.

28.  A number of provisions in the head lease are relevant.

29.  First, the term of the lease.

(a)   Under clause 15, Appreciate had an option to renew the head lease for a term of three years from 1 October 2009 to 30 September 2012 at the existing rent and a further option to renew for another three years commencing from 1 October 2012 to 30 September 2015 at a revised rent to be agreed but in any event not exceeding $144,000. 

(b)   The option was exercised by Appreciate.  The second extension was documented by a letter dated 19 September 2012 between Eastern Group and Appreciate.  It provided for a monthly rent of $144,000, ie the ceiling prescribed in the head lease, and a rental deposit of $432,000 was payable by Appreciate.  After giving credit to the original rental deposit held by Eastern Group, Appreciate was to pay a sum of $152,000.

(c)   It will immediately be noted that when Wealthy Catering took up the head franchise and Superior Luck the sub-franchise on 1 October 2011, that was two years into the first three-year extension of the head lease.  The head franchise and sub-franchise were each for the four-year period from 1 October 2011 to 30 September 2015.  The franchise period therefore straddled across the first extension and the second extension under the head lease.  This, I should highlight here, forms a relevant part of the background to the sub-franchise contract.

30.  Second, the user of the unit.  Under clause 2(l) and Part V of the First Schedule, the unit was permitted to be used for the running of a club house under the name of “Joy Luck Club” or other names as Appreciate should notify for commercial purpose only.

31.  Third, alteration or addition to the unit. 

(a)   Under clause 2(p), Appreciate should not make any alteration or additions to the unit save with the consent of Eastern Group and subject to any condition the latter might impose.

(b)   In respect of such alteration or addition, pursuant to clause 2(p)(iii), Appreciate was under an obligation “at the expiration or soonest determination of [the head lease] at the Lessee’s own cost reinstate and restore [the unit] to the plan and design as if such addition or alteration (or such of them as may be specified by the Lessor) had not been made and make good all damages thereto to the reasonable satisfaction of the Lessor.” 

(c)   As we shall see, clause 2(p)(iii) forms the crux of Wealthy Catering’s claim against Superior Luck under the reinstatement issue.  Wealthy Catering says that the clause was incorporated into the sub-franchise document by reference.

32.  I should pause here to note that based on the materials before the court, it appears that Eastern Group and Appreciate were dealing with each other at arm’s length.

33.  Pursuant to clause 2(p)(iii) of the head lease, Eastern Group gave consent to Appreciate to make alterations to the unit.  But that was subject to the condition that upon termination of the head lease, the unit should be restored to the original state as it was delivered by Eastern Group to Appreciate at the commencement of the head lease, ie in a “bare-shell” state by the removal of all installations, additions and alterations until full exposure of the internal concrete surfaces of all walls, ceilings, pillars and/or floorings of the unit (“見石屎”).

34.  As the owner and operator of the club, Appreciate was responsible for applying for, and renewing annually, the club licence.  In respect of each renewal application, Appreciate would deal with the licensing authority on all compliance matters.  That would include handling regular inspections by, eg, the Fire Services Department.

35.  In about July 2011, due to restructuring of business, Appreciate decided to franchise out the club business as a going concern to Wealthy Catering.  As agreed between the two parties:-

(a)   Wealthy Catering should take charge of the day-to-day running of the club.

(b)   The club would continue to be run under the existing licence held by Appreciate. 

(c)   Appreciate would carry on renewing the licence.  It would be directly responsible for handling the requests made by the licensing authority.  It would inform Wealthy Catering of such requests and advise whether remedial works would be necessary. 

(d)   Wealthy Catering should commission its own contractors to carry out the required works to the satisfaction of the licensing authority so as to ensure the renewal of the licence.  It should bear all expenses incurred by Appreciate in respect of the renewal, eg, submission of plans to government departments etc.

36.  Man acting on behalf of Wealthy Catering invited Shek Wing and Kin Wah to invest in and jointly operate the club due to the busy business engagements of the directors of Wealthy Catering.  Man had known the Hos for some years.

37.  In cross-examination, Man gave more background about how the Hos became involved.  Initially they expressed interest in running a mahjong club in mainland China.  Man then came up with the idea that there was an existing club in Hong Kong in which the Hos might be interested.  Man therefore approached Lau (the chairman of Appreciate), through Leung (Man’s brother-in-law), about this business idea.  Lau expressed reservation about doing business with a partner whom he did not know.  He therefore suggested that Appreciate grant a franchise to Wealthy Catering and the latter in turn grant a sub-franchise to the new partner.  Lau further suggested that Wealthy Catering should retain a 30% stake in the club business.  The sub-franchise terms should largely follow the head franchise terms.

38.  It is common ground that Man and the Hos entered into negotiations and reached some oral agreement with respect to the operation of the mahjong club some time in 2011.  Wealthy Catering’s case is that the negotiations took place in around June and July.

39.  After negotiations, Man and the Hos orally agreed:-

(a)   A new company would be incorporated to take over the franchise from Wealthy Catering to operate the club.  Another new company would be nominated by the Hos to hold 70% of the shares of the new operating company, with Wealthy Catering holding the remaining 30%.

(b)   The Hos’ company was to pay $1,000,000 to Wealthy Catering as consideration.

(c)   Wealthy Catering would take a sub-lease of the unit from Appreciate and would then grant a sub-sub-lease to the new operating company from 1 October 2011 to 30 September 2015.

(d)   The new operating company should comply with all requirements and conditions under the head lease.

(e)   The new operating company would be responsible for the day-to-day operation of the club.  However the operation would remain to be under the supervision and monitoring of Appreciate. 

(f)   The arrangement made between Wealthy Catering and Appreciate regarding the licence would continue to be effective as between Wealthy Catering and the new operating company.  This meant that Appreciate would continue to apply for the renewal of the club licence on behalf of the club.  Further, Appreciate would directly handle the requests made by the licensing authority but any actual works would be carried out by the new operating company under the instruction and supervision of Appreciate, with the new operating company bearing all related expenses.

(g)   The new operating company would fulfil and comply with all the requirements of the licensing authority.

(h)   All utilities would continue to be held under Appreciate’s name for the new operating company.

40.  It should also be added that in the negotiation process, Man expressly made known to Kin Wah the reinstatement condition imposed by Eastern Group on Appreciate.

41.  Pursuant to the oral agreement, Real Stand was set up as the Hos’ company and Superior Luck as the new operating company.  (It should be added that apart from the Hos, Real Stand had other directors and shareholders.)  That was followed by the signing of three documents, which terms substantially reflected the oral agreement. 

42.  First, Appreciate and Wealthy Catering signed a head franchise document.  Second, Wealthy Catering and Superior Luck signed the sub-franchise document.  Third, Wealthy Catering and Real Stand signed the co-operation document.

43.  The head franchise document and the sub-franchise document were effectively back-to-back documents having the effect of passing the franchise from Appreciate to Superior Luck, with Wealthy Catering standing in between. This was in line with the business idea proposed by Lau.  The amount of the monthly rent and the amount of the rental deposit in the two documents are different.  But, apart from that, the content and wording of the two documents is identical, save for two provisions which are not presently material.  The former was undated.  The latter document was dated 1 September 2011. 

44.  I reproduce the sub-franchise document in its entirety below save for the execution clause:-

「 ~ 承租玉龍軒會所經營協議書 ~

出租人：康欣飲食集團有限公司（甲方）

承租人：超瑞有限公司（乙方）

出租地址：粉嶺聯和墟聯捷街榮輝中心地下2-10號舖

合約雙方茲同意租約條款如下：

1.   a)   每月租金為港幣$180,000 [拾捌萬元正]，舖位差餉費用約為港幣$17,000 [壹萬柒仟元正]，須每月以上期方式繳納及以實際差餉為準。

b)   租期為48個月，由2011年10月1日至2015年9月30日。

c)   乙方須付予甲方租約按金港幣$100,000 [拾萬元正]。

2.   乙方須負責繳付每月之煤氣費及水費，另須繳納每月管理費、電費、電話費，另超時冷氣費則以每小時$70計算，即每晚10:00 pm – 翌日6:00 am。

3.   租期由二零一一年十月一日開始，乙方須於每月之五號前繳付租金，租約年期及加租條款等各項細則以欣賞有限公司與東駿易有限公司所訂的租約協定一樣，並遵守牌照部一切經營方式，所有牌照費用及保險費由乙方負責。

4.   乙方將提交50萬元保證金予甲方，若租約期間乙方提前終止合約，或遲交租金超過30天，甲方將有權沒收乙方之保證金用作公司生財工具的保養費，並收回會所之經營權。

5.   乙方每月營業額超過港幣$1,200,000，乙方需額外繳付營業額之1%予甲方作紅利。

6.   a)   甲方各項經常性開支（如：董事局交際費用）$16,000將由乙方負責繼續支付。

b) 甲乙雙方董事可享有簽單權利及各項折扣優惠。細則於附件中列明。」

45.  The material clauses are:-

(a)   Clause 1(a) – the monthly rent was $180,000.  (The monthly rent provided for in the head franchise document was $120,000.)

(b)   Clause 1(b) – the contract term was for 48 months, from 1 October 2011 to 30 September 2015.

(c)   Clause 1(c) – Superior Luck should pay a rental deposit to Wealthy Catering in the sum of $100,000.  (The rental deposit provided for in the head franchise document was $240,000.  The larger amount in the latter was not explained at the trial.)

(d)   Clause 2 – Superior Luck should pay, amongst other things, electricity charges for each month.

(e)   Clause 3 – it was described by Mr But as the most important term of the document.  It provided that the contractual term commenced on 1 October 2011. Superior Luck should pay the rent before the 5^th day of each month. The terms concerning the contractual term and the increase in rent etc should be the same as the lease signed by Appreciate and Eastern Group.  Superior Luck should comply with all operating practice of the licensing department.  All the licence fees and insurance premium should be borne by Superior Luck.

(f)   Clause 4 – Superior Luck should pay security money in the sum of $500,000 to Wealthy Catering.  Should Superior Luck early terminate the contract or default in paying rent for more than 30 days, Wealthy Catering would be entitled to forfeit the security money for the maintenance of the company’s profit-making tools and take back the operating right of the club.

46.  Clause 6(b) of the sub-franchise document referred to terms set out in an appendix.  However, no such appendix followed the document.  The omission was not followed up on or explored by either side at the trial.

47.  I reproduce below the co-operation document in its entirety save for the execution clause:-

「 協議書

出租人：康欣飲食集團有限公司

承租人：真立有限公司

出租地址：粉嶺聯和墟聯捷街榮輝中心地下2-10號舖

現經過雙方友好協商，承租人同意租用上述物業，並達成如下協議：

1. 康欣飲食集團有限公司以港幣100萬（即七成股份）將玉龍軒會所經營權出租予真立有限公司成立超瑞有限公司共同營運玉龍軒會所。

2. 真立有限公司以港幣28萬圓，康欣飲食集團有限公司以港幣12萬，合共港幣40萬作為開業裝修費用。

3. 真立有限公司存放港幣50萬圓予康欣飲食集團有限公司作為經營玉龍軒會所內所有生財工具的保證金。合約期滿將全數退回。

4. 真立有限公司存放港幣10萬圓予康欣飲食集團有限公司作為租金按金。合約期滿將全數退回。

其餘的經營細則以合約為準」

48.  The document was dated 1 October 2011 on its face.  The parties are referred to as the “Lessor” and the “Lessee”.

49.  The material clauses are:-

(a)   Clause 1 – in consideration of $1,000,000 (equivalent to 70% of the shares), Wealthy Catering granted the operating right of the club to Real Stand incorporating Superior Luck to operate together the Joy Luck Club.

(b)   Clause 2 – Real Stand and Wealthy Catering would contribute $280,000 and $120,000 respectively (together totaling $400,000) as renovation expenses for the business.

(c)   Clause 3 – Real Stand would place a sum of $500,000 with Wealthy Catering as security money for all the profit-making tools used in the operation of the Joy Luck Club.  The money would be returned in full upon the expiry of the contractual term.

(d)   Clause 4 – Real Stand would place a sum of $100,000 with Wealthy Catering as rental deposit.  The money would be returned in full upon the expiry of the contractual term.

(e)   There was an un-numbered clause at the end stating that other operating terms would be subject to contract.

50.  It can be seen that these documents are “home-made” documents and the drafting style has led to some real difficulties in its interpretation.  The meanings of some of the words used cannot be gleaned on the face of the documents. For instance, what are profit-making tools?  Some of the wording is imprecise, eg, clause 1 of the co-operation document which refers to the grant of the right “to Real Stand incorporating Superior Luck to operate together” the club.  Does that mean the two companies were to operate the club together or just Superior Luck?  Another example is the reference in the co-operation document to Wealthy Catering as the lessor and Real Stand as the lessee.  On its face, the references are not consistent with the sub-franchise document in which Superior Luck was the party taking up the lease and the franchise right to run the club.

51.  However, the most unsatisfactory part of the two documents must be the provisions concerning the rental deposit and the security money, ie clauses 1(c) and 4 of the sub-franchise document and clauses 3 and 4 of the co-operation document.  On the face of the documents, each of Superior Luck and Real Stand was obliged to pay to Wealthy Catering the rental deposit and the security money.  However, it is common ground that the parties’ intention was that there was only one rental deposit and one security money payable to Wealthy Catering.  It is also common ground that the rental deposit and the security money were in fact paid by Real Stand to Wealthy Catering.  So what to make of the conflicting express provisions?  In fact, it is a live issue as to whether Real Stand paid over the sums in its own capacity or on behalf of Superior Luck.  This is the deposit issue to which I shall have to return later.

52.  While there are difficulties presented by the drafting of the documents, the business structure contemplated in the two documents, on their face, did on the whole appear to put Lau’s original idea into execution.

53.  The fundamental position of Wealthy Catering is that notwithstanding the oral negotiations which had taken place and the oral agreement reached in the process, such oral agreement did not form part of the contracts ultimately reached between the parties.  This is because the parties eventually proceeded to sign the written documents, which for all intents and purposes are to be taken to contain exclusively the contractual terms governing their rights and obligations.  In other words, using my terminology, the “sub-franchise contract” was effectively the sub-franchise document, without more, whereas the “co-operation contract” was effectively the co-operation document, again, without more.  It is however accepted by Wealthy Catering that such oral discussion does form part of the factual matrix against which the written documents are to be construed. 

54.  On this premise, Wealthy Catering says three things.

55.  First, based on clause 3 of the sub-franchise document, clause 2(p)(iii) of the head lease was incorporated by reference.  As such, upon termination, Superior Luck was obliged to reinstate the unit to the state in which it was originally delivered by Eastern Group to Appreciate under the head lease, ie in a “bare-shell” state. 

56.  In fact, it is part of Wealthy Catering’s pleaded case that by virtue of clause 3, the sub-franchise to Superior Luck was “subject to the other terms and conditions” in the head lease.  In other words, not only was clause 2(p)(iii) incorporated, Wealthy Catering’s position is that all the terms of the head lease were incorporated.

57.  It is also Wealthy Catering’s case that Man handed over a copy of the head lease to Kin Wah when the sub-franchise document and the co-operation document were executed.   

58.  This is the reinstatement issue referred to above. 

59.  Second, based on, again, clause 3 of the sub-franchise document, Superior Luck was wholly responsible for attending to the licensing matters for the club, including the annual renewal.  In this regard, Wealthy Catering relies on the express words “並遵守牌照部一切經營方式，所有牌照費用及保險費由乙方負責”. It also relies on the earlier negotiations between Man and the Hos on licensing (see para 39(f) above) as the relevant factual background to the construction of these express words.

60.  Third, notwithstanding the apparently conflicting provisions in the sub-franchise document and the co-operation document, the rental deposit and the security money was paid by Real Stand, acting on behalf of Superior Luck. As such, they were sums liable to be repayable to Superior Luck upon termination, subject to any set-off Wealthy Catering might have.

61.  The payments stipulated in the two contracts were made.   

62.  Superior Luck started to operate the club on 1 October 2011. 

63.  It is common ground that the monthly rent under the sub-franchise contract was increased from $180,000 to $200,000 with effect from 1 October 2012.  The timing coincided with the rent increase under the head lease upon the extension of the second three-year term – see para 29(c) above.

64.  Following the rent adjustment in October 2012, Superior Luck entered into a written agreement with Appreciate.  Wealthy Catering was not a party but it pleads that the agreement was made with its consent.  This is another one-page Chinese document dated 23 May 2013.  It was entitled “調整按金協議書” and referred to Appreciate as the “Lessor” (“出租人”) and Superior Luck the “Lessee” (“承租人”).  It provided that Superior Luck agreed to pay a further rental deposit of $152,000 to Appreciate by instalments.  The first instalment was scheduled for May 2013 and the last one March 2014.  In fact, Man said that it was Real Stand who wanted Superior Luck to pay the further deposit directly to Appreciate.

65.  Since the commencement of the sub-franchise and up to 2014, Superior Luck took up the responsibility for the renewal of the club licence.  Superior Luck, through its secretary, a Ms Lau, contacted the representative of Appreciate, usually a Mr Cheng Kam Kwong, from time to time to apply for the renewal of the licence.  (Ms Lau was previously employed by Appreciate.)  She would arrange for Appreciate to sign on the necessary documents for the renewal applications.  She would also communicate directly with Appreciate with regard to any request of the licensing authority.

66.  Whenever Appreciate received any request from the licensing authority, it would communicate directly with Superior Luck through Ms Lau.

67.  Wealthy Catering stresses that it had never handled or become involved in any renewal application and that it had never promised to assume any duty to Superior Luck with regard to the renewal.

68.  The latest licence of the club was valid until 22 July 2015.  In April of the same year, Appreciate submitted a renewal application to the licensing authority.  On 20 July, the licensing authority issued a letter to Appreciate referring to an inspection which it had undertaken on 2 June, in the course of which it found four matters that required immediate rectification.  The letter went on to state that in June and July, a number of phone calls were made to Appreciate demanding that follow-up works be done as soon as possible.  The purpose of the letter was to remind Appreciate to take action to rectify the situation, failing which the licence might not be renewed.  The four matters were:-

(a)   There were three openings in a fire-proof wall between the club area and the non-licensed area.

(b)   The “VIP Room 2” in the club was altered to be used as a storage room.

(c)   Without the written consent of the Director of Home Affairs, there was an increase in the number of dining tables and seats.

(d)   A latch was installed on the door of the original storage room stopping it from shutting down automatically.

69.  Man said that it was his understanding that Ms Lau had given the letter to Kin Wah.  Kin Wah later told Man that Wealthy Catering should deal with the licensing authority’s requests as the unit was let by it to Superior Luck.  Man immediately refused as it had always been Superior Luck who complied with the licensing requirements.  But Man offered to ask around for contractors if Kin Wah needed his assistance.

70.  Around the end of August 2015, Shek Wing attended a meeting with Man, and representatives of Appreciate, including, amongst others, Lau, Leung and Chui.  In the meeting:-

(a)   Wealthy Catering and Superior Luck were notified that Eastern Group would not renew the term of the head lease upon the scheduled expiry on 30 September 2015 and that they should remove all the fittings in the unit and reinstate it to the original state by 30 September.

(b)   Shek Wing, on behalf of Superior Luck, agreed to reinstate by the end of September.

(c)   Appreciate suggested to Man that he should obtain quotations from contractors for the reinstatement as given the size of the unit, the works would take at least two to three weeks.

71.  In cross-examination, Man stressed repeatedly that the key issue then was the timing of the return of the unit.  Lau mentioned at the meeting that Eastern Group had leased the unit to a chain supermarket store and therefore must return the unit as scheduled.

72.  Some time after that meeting and in late August, Kin Wah told Man that given the club could only operate until 30 September, it would not be financially sound to continue with the renewal application and that any costs or expenses to be incurred by Superior Luck for complying with the requests of the licensing authority would become wasted.  In reply, Man insisted that the requests must be complied with and the club could not carry on without a valid licence.  Kin Wah disagreed with that.  As a result, the requests of the licensing authority were never complied with. 

73.  In cross-examination, Man added that around this time, there were a series of discussions between him and Kin Wah.  In addition to the licensing issue, Man also highlighted the need to reinstate the unit by the end of September.  In response to that, Kin Wah initially insisted that Superior Luck would carry on until the last day of September but later on said he would ask Shek Wing about it.  However, the discussion during this period in respect of reinstatement was omitted from Man’s witness statement and was a revelation emerging for the first time in oral testimony.

74.  Superior Luck defaulted in paying the rent for September which was due on the 5^th.  The rent has remained unpaid to date.

75.  There was a second meeting held on about 12 September at the unit between, amongst others, Kin Wah and Man.  In that meeting:-

(a)   Man reported that he had obtained quotations from contractors for the reinstatement works.

(b)   However, Kin Wah insisted that the business should carry on until the last day, ie 30 September.

(c)   Man disagreed because Shek Wing had agreed with Appreciate in the last meeting that Superior Luck would deliver vacant possession in its original state before the end of the month and in any event he was obliged to.  Time would be required to complete the reinstatement works.

76.  The second meeting ended unhappily, with Superior Luck refusing to cease business before the scheduled expiry to allow time for the reinstatement. Because of that, Wealthy Catering and Kin Wah did not communicate with each other after the meeting.

77.  In his cross-examination, Man supplemented the above account of the second meeting with the following new revelations:-

(a)   The meeting was held at a dinner which lasted about three hours.

(b)   Initially, Kin Wah confirmed that Superior Luck would allow time for the reinstatement of the unit.

(c)   However, after making a call to Shek Wing, Kin Wah went back on his words and insisted that Superior Luck would continue its business until 30 September.

78.  By then, Superior Luck still had not paid the rent for the month. Furthermore, there was no sign of Superior Luck taking any steps to reinstate the unit.

79.  Accordingly, Wealthy Catering instructed its solicitors, Cheung Wong & Associates (“CWA”), to issue a letter dated 18 September 2015 to Superior Luck.  (In that letter, CWA stated that they represented both Appreciate and Wealthy Catering.)  The letter stated and requested, amongst other things:-

(a)   According to clause 2(p)(iii) of the head lease, Appreciate should deliver vacant possession (“交吉”) of the unit to Eastern Group.

(b)   Since July 2015, Superior Luck had been operating the mahjong club in the absence of a proper government licence.  This had seriously affected the legal rights of Appreciate and Wealthy Catering.

(c)   Superior Luck was requested to reinstate the unit and deliver vacant possession (“還完交吉”) to Wealthy Catering on 30 September 2015.

(d)   Superior Luck was asked to cease operating the mahjong club without a proper licence.

80.  On about 19 September, Man attended the unit and told the manager of the club to remind Shek Wing and Kin Wah to reinstate the unit to the original state and vacate the unit by the end of the month.

81.  On 25 September, Wealthy Catering was informed by Appreciate that Superior Luck would be delivering the unit to Appreciate.  On the following day, Wealthy Catering was again informed by Appreciate that Wealthy Catering had vacated the unit without reinstating it to the original state.  A written acknowledgment of the handover in Chinese was signed by Superior Luck and Appreciate.  On it was pre-typed the words “交吉” meaning “handover of the vacant unit”.  But in the signed version those words were amended to “交場” meaning “handover of the unit” in handwriting.

82.  As a result of Superior Luck’s failing to reinstate the unit, Wealthy Catering was in breach of its equivalent obligation owed to Appreciate under the head franchise document.  In the end, Wealthy Catering carried out works to reinstate the unit to its “bare-shell” state.  The works commenced on 3 October and were completed on 19 October and it incurred a cost of $561,200.  Quotations and invoices issued by a contractor called Art Work Engineer have been disclosed in these proceedings.  Wealthy Catering also paid a sum of $125,083 to Appreciate for the rent or mesne profit for occupying the unit during the reinstatement period.  An invoice issued by Appreciate to Wealthy Catering for that amount has also been disclosed.

83.  Further, Superior Luck has failed to pay the electricity charges from 3 September 2015.  Wealthy Catering relies on the electricity bill issued on 2 October 2015 and the amount charged for the period from 3 September to 2 October is $29,659.  Since the unit was not occupied after Superior Luck left and the reinstatement works commenced on 3 October, Wealthy Catering says that Superior Luck should be responsible for the whole sum charged in the electricity bill.

84.  In summary, Wealthy Catering claims that it has suffered a loss totaling $315,942, with breakdown as follows:-

Arrears of rent for September 2015	$200,000
Electricity charges for September 2015	$29,659
Reinstatement costs	$561,200
Rent for the reinstatement period	$125,083
Less credit given to
(i) the rental deposit	($100,000)
(ii) the security money	($500,000)
Total	$315,942

85.  As regards the further rental deposit in the sum of $152,000 paid by Superior Luck to Appreciate, that had nothing to do with Wealthy Catering as the money did not go through its hands.

THE CASE OF SUPERIOR LUCK AND REAL STAND

86.  I now turn to the case of the defendants.  There is in fact a fair amount of common ground between the parties.  I therefore focus on those parts of the defendants’ case which significantly differ from Wealthy Catering’s, with particular emphasis on the issues of reinstatement, licensing and deposit.

87.  In about September 2011, Man acting on behalf of Wealthy Catering started discussing with the Hos about getting them and their friends to be involved in the running of the mahjong club.  At that time, Man told Kin Wah and Shek Wing that the club was solely run by Wealthy Catering.  In the discussion, there was no mention at all about any lease between Wealthy Catering and Appreciate.  In fact, at that time the Hos did not even know about Appreciate. They only got to know about the company at a later stage. 

88.  The sums of $1,000,000, $500,000 and $100,000 as agreed in the course of the oral negotiations were paid to Wealthy Catering in late September 2011. Then Superior Luck took over the club on 1 October but the club was closed for five days for the replacing of the air-conditioners.  The renovation costs referred to in clause 2 of the co-operation document were to cover the costs of the new air-conditioners.

The licensing issue

89.  In respect of the licensing issue, the defendants’ case is as follows.

90.  In the negotiations, it was agreed that all matters concerning the club licence, including its application, renewal and maintenance should be handled in the existing way, ie to be handled by Wealthy Catering solely and exclusively but that the licence fees and any insurance premium would be borne by the new operating company.

91.  Both Kin Wah and Shek Wing emphasised that they were aware that the operation of a mahjong club in Hong Kong required a valid licence and it would be of utmost importance that the licence be properly taken care of.  It was also considered more appropriate to maintain the existing licence and have it renewed instead of applying for a new one since a new licence was known to be extremely difficult to get. 

92.  In cross-examination, Shek Wing stressed that the crux of the bargain was the right to operate the mahjong club.  That right must come as a whole package covering the proper licence alongside with the use of the mahjong tables and furniture etc.  Superior Luck was solely concerned with operating the club.  At that time, the Hos did not even know who the licence holder was since the matter about licensing was solely a matter for Wealthy Catering.  When asked why he would not be concerned with the identity of the licence holder, Shek Wing emphasised that Superior Luck was not acquiring the business outright but was only acquiring the right to operate for a four-year period.  When asked if he was taking a big risk, Shek Wing pointed out that in any event Wealthy Catering was also a director of Superior Luck and it retained a 30% stake in the business.

93.  The defendants contend that the sub-franchise contract contained the following implied terms:-

(a)   Wealthy Catering should co-operate with Real Stand and/or Superior Luck to ensure the performance of the bargain, ie the mahjong club business could be carried on at the unit legally.

(b)   Wealthy Catering should not do anything which would result in the absence of effective licence in respect of the mahjong club business.

94.  Since Superior Luck took over the club, Wealthy Catering had been responsible for dealing with the licensing matters.  Neither Superior Luck nor Real Stand had been involved except when Wealthy Catering asked Shek Wing or Kin Wah to sign cheques for payment.  Except for the last renewal in 2015, according to the Hos’ recollection, Wealthy Catering had never informed either of them of any matter concerning licensing save that Wealthy Catering was dealing with it or the licence had been renewed when the Hos mentioned the matter.

95.  As to the role of Ms Lau, it was Man who introduced her to the Hos and recommended that Superior Luck took her on to handle its accounts.  The Hos acceded to the request and Superior Luck employed Ms Lau as its accounting clerk.  But prior to that, the Hos’ understanding was that Ms Lau was employed by both Appreciate and Wealthy Catering.

96.  The defendants stress that Ms Lau was employed only as the accounting clerk of Superior Luck and that she was not employed to handle the licensing matters on its behalf.  Ms Lau had a place to work within the unit but she would also do work there for Wealthy Catering and Appreciate.  The Hos knew that Ms Lau had some knowledge of Wealthy Catering’s handling of the licensing matters.  Sometimes they would ask Ms Lau to remind Man of the expiry date of the current licence but they did so purely because of her working relationship with Wealthy Catering.  But they would not ask Ms Lau to handle any licensing matter. 

The signing of the sub-franchise document and the co-operation document

97.  It is common ground that following the negotiations between Man and the Hos, the companies were set up.  The defendants’ stance is, as stated in the witness statements of both Kin Wah and Shek Wing:-

“Although at the time of the verbal agreement between the parties the relevant companies were not set up. There is no doubt that the intention between everyone was that the agreement would bind the companies once they were set up. In fact the relevant companies, after they were established, did perform the agreement accordingly and treated themselves as being bound by the agreement.”

98.  Although the sub-franchise document and the co-operation document were dated 1 September 2011 and 1 October 2011 respectively, they were indeed signed some time in October of that year.  What happened was that after Superior Luck took over the business, Man told Shek Wing one day that Wealthy Catering would like to put the agreement between the parties in writing.  Accordingly, Kin Wah signed the documents.  He said that he did not really read through the documents carefully and when he signed it, he believed that they merely reduced what the parties had agreed into writing.

99.  In cross-examination, Shek Wing said that the date of 1 September 2011 was picked randomly for the sub-franchise document. 

100.  Based on the above factual premise, Mr Chai submitted that Wealthy Catering, Superior Luck and Real Stand entered into an agreement or agreement(s) (which he then defined as “the Agreement”) orally, by conduct and in writing.  While Mr Chai contemplated in his submissions a composite tripartite agreement, in my view, for analysis purpose, it is more convenient to deal with the relationship between the parties separately by reference to the sub-franchise contract and the co-operation contract.  One of the material terms was that the licensing arrangement would be in accordance with what was orally agreed between Man and the Hos in the course of their negotiations as stated in para 90 above.  By conduct, the companies treated themselves bound by the orally agreed terms.  The written part of the contracts was contained in the two documents.

The reinstatement issue

101.  On the reinstatement issue, the defendants say the following.

102.  When Man spoke to Shek Wing about having the agreement reduced to writing, Man also mentioned that there was a landlord “up above” Wealthy Catering, namely Appreciate.  He also mentioned that that lease would have to be renewed within the four-year franchise period and the rent would have to be adjusted.  Man therefore suggested that a clause should be inserted into the written documents referring to such renewal and adjustment of rent.  That was the background to clause 3 of the sub-franchise document.  Apart from this, the parties never agreed to incorporate or follow any other term in any lease “up above”.  There appears to be a discrepancy between Shek Wing’s oral evidence and the defendants’ witness statements on the timing of when Man raised the rent adjustment issue.  In cross-examination, Shek Wing seemed to suggest that it was mentioned earlier in the course of the parties’ negotiations.

103.  Shek Wing asked Kin Wah to follow up on the signing.  Kin Wah denies that Man handed over a copy of the head lease to him when the written documents were signed.

104.  The defendants’ position on reinstatement is therefore that it was never the intention of the parties that clause 2(p)(iii) of the head lease was to be incorporated into the sub-franchise contract.  Therefore, Superior Luck was under no obligation to reinstate the unit to a “bare-shell” state.

What happened in 2015

105.  Some time before the expiry of the club licence in July 2015, the Hos, as usual, asked Ms Lau to remind Wealthy Catering about the renewal.  Ms Lau told Kin Wah that Wealthy Catering had already been working on it. 

106.  In about June or July, the manager of the club told the Hos that there had been an inspection of the unit by the Fire Services Department and some comments were made.  After the inspection, the manager was told that the three openings in a wall had to be dealt with.  She told the Hos that she had already told Man about it.  Kin Wah also followed up on it with Man.  Man replied that it was a simple matter and he would deal with it.  The Hos trusted that Wealthy Catering would resolve the issue in due course.

107.  The Hos deny that there was a meeting in August as alleged by Wealthy Catering.  Both of them were in Japan in late August and they did not meet Man then.  However, there were in fact meetings held in September. 

108.  The first meeting was in early September.  Chui of Appreciate went to the club one day and spoke to Shek Wing asking him whether Superior Luck would be interested in extending the franchise for six months and he could help on this.  Shek Wing replied that he could not decide then as he also needed to know Man’s view.  A meeting was therefore arranged and amongst the attendees were Shek Wing, Leung, Lau, Chui and Man.  In the meeting, the issue of extension was discussed.  The conclusion was however that Superior Luck would not extend the franchise.  Therefore after this meeting, the parties knew clearly that the business would cease by 30 September.  But nothing was mentioned about reinstatement at all. 

109.  There was then a meeting held on about 12 September.  Kin Wan, Man and others were there.  In the meeting, Man asked Kin Wah if Superior Luck could deliver the unit to Wealthy Catering before 30 September.  Kin Wah insisted that according to their contract, Superior Luck had the right to carry on the club business up to 30 September.  Superior Luck had the right to so insist particularly when Wealthy Catering offered no compensation for the early return of the unit.  No agreement was reached when the meeting concluded.

110.  The next material event was Man’s visit to the club on about 19 September.  The defendants say that during that visit he did not ask the manager to remind the Hos to reinstate.  Instead, Man told the staff there that the club licence was no longer in place and they should cease to operate the business, otherwise he would make a report to the police.

111.  Wealthy Catering never informed Real Stand or Superior Luck of the four requests made by the licensing authority.  In fact, up until Man’s visit to the club on 19 September, Wealthy Catering had never informed them that there was any difficulty in the renewal application.  All along, the Hos were not aware of the need to do anything about the licence.

112.  As regards the four matters raised by the licensing authority, the Hos said that they were simple matters and could have been easily dealt with.  The beer stored in VIP Room 2 could be removed.  The additional tables and seats could also be moved away.  And so could the latch.

113.  Even though Superior Luck did not receive a hard copy of a renewed licence after 22 July 2015, the Hos did not see that as a problem as according to their experience, the licence authority might issue a renewed licence some time after the expiry date of the current one but it would allow the business to carry on pending the approval of the renewal.

114.  The defendants contend that Wealthy Catering was in breach of its licence obligation.  Superior Luck ceased to operate the business from 19 September.

115.  Then, Superior Luck received the letter from CWA dated 18 September. The Hos were surprised by its content.  All along the licensing matters were handled by Wealthy Catering.  The Hos never doubted its willingness and ability to handle the matter.  But the letter appeared to point the finger at Superior Luck about the absence of licence since July. 

116.  Some time after the receipt of the CWA letter of 18 September, Chui called Shek Wing.  Chui obviously knew about the dispute between Man and the Hos. Chui asked whether Superior Luck could deliver the unit to Appreciate a little earlier.  Chui asked the Hos to “give him some face”.  Shek Wing’s thinking then was that the business could not be carried on any way as there was no valid licence.  He therefore agreed that Superior Luck should attend the unit on 26 September for handing over the unit.  Chui would ask Man to attend also so that the matter could be resolved in the presence of the three parties.

117.  On 26 September, Kin Wah attended the unit.  Chui was there but Man was not.  Chui was happy with the state of the unit and he accepted it without any complaint.  There was no mention about reinstatement or removal of the fittings.  When Kin Wah left, Chui asked him to inform Man that Appreciate had accepted the unit, which he did.

118.  By a joint letter dated 30 September, Superior Luck and Real Stand informed Wealthy Catering that the latter’s failure to maintain a proper licence for the mahjong club amounted to a repudiation of the contract and that the two companies accepted the repudiation thus terminating the contract with Wealthy Catering with immediate effect.

119.  The defendants also put forward an alternative case. If Superior Luck was in breach as alleged, the breach was committed as a result of Wealthy Catering’s breach of the fiduciary duty which it owed to Superior Luck as one of its directors in that it had failed to take any steps to prevent or remedy the situation.  In the circumstances, Wealthy Catering is not entitled to claim against Superior Luck.  Furthermore, by reason of such breach, Wealthy Catering is liable to pay equitable compensation to Superior Luck which should be set off against any amount owing to Wealthy Catering.  There is however no quantification of such equitable compensation.  Also, this line of argument does not apply to Real Stand.

120.  As regards the rent for September, according to Kin Wah’s explanation in cross-examination, Superior Luck never as a matter of practice paid rent before the 5^th of each month.  It often paid around mid-month.  For September 2015, by the time the accounts department prepared the cheque, it was already around 18 September.  Given the dispute between the parties, Kin Wah did not release the cheque.  And that was why Superior Luck did not pay the rent for that month.

121.  The defendants deny that they should pay the electricity bill which was issued in October.  In fact, there was a deposit of $74,000 held on the account with the electricity company and it had been paid by Superior Luck.  The electricity charges can be deducted from that deposit.

122.  As to the reinstatement claim, if the defendants are liable, they say that Wealthy Catering failed to mitigate its loss.  The amount of the reinstatement costs, it is argued, is excessively and unreasonably high and the time spent was excessively and unreasonably long.  Wealthy Catering could have hired an excavator to clear all the structures at the unit and it would take no more than two or three days to complete the works and would not cost anything more than $150,000.

123.  In fact, Kin Wah paid a visit to the unit on two occasions in October. From what he could see from the outside, the clearance work was almost done on 6 October and there were supermarket racks installed inside the unit on 18 October.  The unit later became a chain supermarket store.

124.  In its counterclaim, Superior Luck makes the following claims against Wealthy Catering:-

(a)   Loss of income to be assessed.  No particulars are given in the pleading.

(b)   Wealthy Catering gave away to some third party frozen meat and furniture owned by Superior Luck, without its consent.  Again, no particulars are given in the pleading save that the value was said to be over $200,000.  Superior Luck asks for the value to be assessed.

(c)   The return of the security money of $500,000.

(d)   The return of the rental deposits of $100,000 and $152,000.

(e)   Alternative to (c) and (d) above, a declaration that Wealthy Catering was in breach of “the Agreement” and/or that it is not entitled to forfeit the security money and the rental deposit.  (However, the term “the Agreement” has not been defined at all in the pleading.) 

125.  The witness statements filed by the defendants make no reference to the claims for loss of income and the value of the frozen meat and furniture.  In opening, Mr Chai confirmed that the defendants will not pursue these two heads of counterclaim.

126.  In its counterclaim, Real Stand asks for the same relief in para 124(c) and (d). 

127.  Having set out the parties’ cases, I now turn to evaluate the evidence. Based on the facts as found, I shall then proceed to consider the rights and obligations of the parties under the contracts.

THE EVIDENCE

128.  The resolution of the factual disputes primarily turns on the credibility of the witnesses, who have given conflicting accounts of the same events relevant to both the reinstatement issue and the licensing issue.  My task is to evaluate the competing evidence against the backdrop of undisputed and indisputable facts.  I am to weigh the inherent probabilities of the parties’ cases.  Contemporaneous documents should be given due weight in the assessment exercise.  The internal consistency (or inconsistency) of the witnesses’ evidence should be taken into account.  The court would also be guided by its overall impression of the characters and motivations of the witnesses: see, eg, Re B (Children) [2009] 1 AC 11, para 31, per Baroness Hale, cited in Standard Chartered Bank v Li Wai Ping HCA 10587/2000 and 3573/2003, 17 February 2011, para 19.

The important factual background

129.  I should highlight at the outset the undisputed or indisputable factual background which I consider to be material.  There are two matters which are of significance. 

130.  First, as noted above, the two documents which form the subject-matter of the present actions are “home-made” documents drafted apparently without any assistance from legal advisers.  Indisputably, the documents contain inconsistencies and unclear provisions. 

131.  For instance, while on a literal interpretation of the two documents, each of Superior Luck and Real Stand was obliged to pay the rental deposit and the security money to Wealthy Catering, the undisputed intention of the parties had always been that Wealthy Catering was to receive the two sums only once, but not twice over.  Another example is the use of the terms “出租人” (lessor) and “承租人” (lessee) in both documents.  The use of such terms was confusing and did not accurately reflect the roles of the parties.  It was the clear intention of all concerned that Superior Luck would be the “new operating company” which would take over the running of the mahjong club.  It could therefore be properly described as the “承租人”, denoting that it was the lessee of the unit and the franchisee of the club business.  But the same cannot be said of Real Stand, who was not intended to be the operator of the club. 

132.  I think it can fairly be said, with no disrespect to any of them, that Man, Shek Wing and Kin Wah were businessmen who did not pay too much attention to legal semantics when drafting their documents.  Their focus was to record the essential terms of the commercial bargain which had been struck.  That would include, most importantly, all terms which had to do with payment.  They would not be too concerned with the use of correct terminology and they did not appear to have carefully thought through the legal implications of their drafting.

133.  Second, when Man, Shek Wing and Kin Wah were in negotiations (whether in June and July or September 2011), the club had already been in business and it had already been operating under a valid licence.  It is against this factual background that Real Stand invested $1,000,000 to acquire a 70% stake in the operating right of the club.  This is to be contrasted with a situation where a brand new club business was to be launched and a fresh licence was to be applied for.

134.  Having assessed the evidence on an overall basis, I prefer the defendants’ factual evidence to that of Wealthy Catering, where they are in conflict.  I highlight the following matters which I consider to be material in the assessment exercise.

First, the defendants’ factual case on the reinstatement issue is more likely to be true than Wealthy Catering’s when viewed against contemporaneous documents

135.  The parties’ factual cases on the reinstatement issue are to be viewed against the undisputed factual backdrop that when Superior Luck took over the club, it was already in operation.  There were about 30 rooms in the club area and the mahjong tables were already there.  In other words, when Superior Luck took over, the unit was fully furnished and not in a “bare-shell” state. 

136.  In the ordinary course of things, a lessee in Superior Luck’s position would normally be expected to return the unit in the original state in which it was delivered at the beginning of the lease, unless otherwise agreed by the parties.  Given that the reinstatement of the club area to a “bare-shell” state would foreseeably be fairly costly and time-consuming given its large size, one would expect that any special requirement for the lessee to so reinstate upon termination would be an important term of the bargain and would be expressly spelt out.  But there was no express provision in either the sub-franchise document or the co-operation document highlighting this alleged obligation on the part of Superior Luck. 

137.  I note repeatedly above that the parties drafted their documents without any professional legal help.  However, one would still expect that Man should have realised the commercial importance of the obligation and should have put in an express term in the documents with regard to such obligation, if it had indeed been agreed in the negotiations.  Instead what Wealthy Catering now relies on is an indirect reference to the reinstatement term by incorporating the head lease.  The absence of such an express term is therefore more consistent with the defendants’ factual case that no such term had ever been discussed or agreed between the parties. 

Second, the defendants’ factual case on the licensing issue is more in line with business rationale than Wealthy Catering’s

138.  The dispute on the licensing issue is to be evaluated in the context of the business rationale of the commercial bargain and against the factual backdrop that when the deal was negotiated, the club was already operating under a licence held by Appreciate.

139.  In its pleadings, Wealthy Catering chose to refer to the sub-franchise contract as “the 2^nd Sub-Tenancy Agreement”.  In his written submissions, Mr But adopted the defined term “the 2^nd Sub-Lease”.  Nevertheless, when one looks at the substance of the commercial bargain, the objective fact is clearly that it was more than a simple lease of the unit.  Most notably, the documents made repeated references to the “profit-making tools” – see clause 4 of the sub-franchise document and clause 3 of the co-operation document.  The tools included the mahjong tables.  There was no evidence as to the costs of these tables.  However, from the way the witnesses had been referring to them in their oral testimony, they seemed to be of some value. 

140.  In addition to the mahjong tables, an essential part of the franchise was of course the club licence.  The licence was a pre-requisite to the running of the mahjong club.  The objective fact here is that there was no change of the licence holder after the sub-franchise took effect.  It remained to be Appreciate.  The evidence of Shek Wing and Kin Wah that a fresh licence was difficult to get is plausible.  In such circumstances, it seems inherently probable that the bargain struck between the parties was that Superior Luck would look solely and exclusively to Wealthy Catering as franchisor to take care of the licence.  In this regard, Wealthy Catering’s case that Appreciate would directly handle requests made by the licensing authority and Wealthy Catering would not assume any duty vis-à-vis Superior Luck would appear to be inherently improbable in that it seems to go contrary to the whole idea of a franchise granted by Wealthy Catering to Superior Luck. 

141.  As Mr Chai put it in his closing submissions, the subject-matter of the transaction was the franchise of the mahjong business.  One therefore asks rhetorically – why should Superior Luck look to a third party, instead of the franchisor, to handle one of the most important aspect of the franchise, namely the licence?

142.  It is common ground that Superior Luck would bear all the expenses associated with the licence.  As the operator of the club, naturally, it should also comply with the requests made by the licensing authority so as not to jeopardise the licence or any renewal.  And this seems to be the purpose of the provision “並遵守牌照部一切經營方式” (“complying with all operating practice of the licensing department”) in clause 3 of the sub-franchise document.  The defendants’ factual case on the licensing issue seems to accord better with inherent probabilities than Wealthy Catering’s, when viewed against the business rationale of the franchise.

Third, Wealthy Catering’s factual case on the licensing issues accords less well with the objective facts than the defendants’

143.  As regards the factual disputes on the knowledge of the four requests made by the licensing authority in 2015, the defendants’ case is straightforward, coherent and easy to understand whereas the case of Wealthy Catering is not as straightforward and there are aspects to it which are quite inexplicable.

144.  In essence, the defendants say that in July 2015, they reminded Wealthy Catering, through Ms Lau, of the need to renew the licence and that they knew about the three openings in the fire-proof wall through the club manager.  Kin Wah was assured by Man that Man would deal with it as it was a simple matter. Both Shek Wing and Kin Wah did not realise that there would be any problem with the renewal until Man’s visit to the club on about 19 September when he announced to the staff that the club licence was no longer in place.  There and then Superior Luck ceased to operate the business.  The defendants’ factual case is on the whole coherent.

145.  On the other hand, Wealthy Catering says that the Hos all along knew about the four requests made by the licensing authority but did not fix the issues.  According to Man’s conversation with Kin Wah in late August, the latter said that since the franchise would expire on 30 September, it would not fix the issues as the costs would become wasted.

146.  This allegation must however be assessed bearing in mind the nature and gravity of the four requests made by the licensing authority.  In this regard, I accept the Hos’ evidence that they were all simple matters and could have been easily dealt with.  Two of the items would only involve moving some of the furniture from one place to another.  And the two other items would appear to require works of a very minor nature and would not be costly at all.  Shek Wing said that the monthly turnover of the club was over $1,000,000.  This is supported by the audited accounts of Superior Luck disclosed in these proceedings.  From incorporation to 31 March 2013, the total turnover was stated to be just over $19,000,000.  The costs which might have to be incurred for the minor works would clearly be just a small sum in a business of this scale.  If, as alleged by Wealthy Catering, Superior Luck had known about the licensing issues as early as in July, there is no plausible reason why Superior Luck would deliberately choose not to deal with them and run the risk of operating the club illegally without a licence for two more months.  For the same reason, the allegation that Kin Wah did not want to incur such “wasted” costs is not credible as there were not much costs to be “wasted” to start with.

Fourth, the discrepancies in Man’s evidence are more material than those in the Hos’

147.  I have taken into account that the factual evidence of both sides contains inconsistencies and the witnesses from both sides made new allegations under cross-examination, which were not included in their witness statements. 

148.  In his closing submissions, Mr But set out a list of inconsistencies in the defendants’ factual evidence.  In my view, the more notable examples are the following two.

(a)   Shek Wing mentioned for the first time in cross-examination that there was an office within the unit which was exclusively used by people from Appreciate.

(b)   There was inconsistency in Kin Wah’s oral and written evidence.  Under cross-examination, he said that he did not know about the role and identity of Appreciate until close to the handover in September 2015.  However, in his witness statement, he said that Man explained to him that Appreciate was the landlord “up above” when he signed the sub-franchise document back in 2011. 

149.  Mr But also highlighted a letter dated 1 June 2015 issued by Eastern Group to Appreciate confirming that the head lease would not be renewed after 30 September 2015.  The point here is that given the authenticity of this letter is not challenged, it serves as a piece of contemporaneous document which contradicts the defendants’ allegation that as late as in early September 2015, Superior Luck was offered the opportunity to continue the business for another six months.  Mr But submitted that there is no evidence before the court that Appreciate somehow managed to extend the head lease notwithstanding the notice given on 1 June 2015.  There is some force in the argument but it is not conclusive.

150.  For Wealthy Catering, the new allegations made by Man for the first time in cross-examination concerning the discussion the parties had on reinstatement in August and September 2015 have been set out in detail in paras 73 and 77 above. 

151.  Because of these discrepancies in the evidence of all the three witnesses, some doubt is cast on the reliability of the evidence of each of them.  However, relatively speaking, the discrepancies in Man’s evidence would appear to me to be more material for the following reasons.

152.  The breach of the reinstatement obligation forms a material part of Wealthy Catering’s claim.  The evidence surrounding the parties’ discussion about this topic close to the termination of the franchise would be of vital importance.  It is difficult to understand why Man was able to give a detailed account of how Kin Wah vacillated on this issue in cross-examination but not in his earlier witness statement.  In my view, this casts significant doubt on the reliability of Man’s evidence as whole. 

Fifth, and lastly, Shek Wing came across as more credible amongst the three witnesses

153.  Lastly, based on my observation of the witnesses, overall speaking (and subject to what is said above), I find Shek Wing to be a credible witness on the whole and, relatively speaking, more so than Man.  Shek Wing testified in a firm, articulate and clear manner.  He remained unshaken and confident in his answers despite the lengthy cross-examination.  He was able to spell out the business rationale of the commercial bargain (see, eg, para 92) which sounds reasonable and plausible, thus bolstering his credibility.  Man, on the other hand, came across as less confident and at times hesitant.

Factual findings

154.  On a balance of probabilities, I find as facts, subject to two exceptions, the evidence of the defendants. 

155.  Most importantly, I find that:-

(a)   The negotiations between Man and the Hos took place in September 2011.  There was no discussion on the need to reinstate the unit to a “bare-shell” state upon its return.

(b)   In the negotiations, it was agreed that all matters concerning the licence, including its renewal, would be handled solely and exclusively by Wealthy Catering.

(c)   The sub-franchise document and the co-operation document were signed after Superior Luck took over the operation of the club on 1 October 2011 and at the request of Man.

(d)   Throughout the franchise and up until July 2014, Superior Luck did not handle the licence renewal, whether through Ms Lau or otherwise.

(e)   The Hos were not aware of any problem with the renewal of the licence until Man’s visit to the club on about 19 September 2015.

(f)   The discussion between the parties in August and September 2015 was as alleged by the Hos.  Superior Luck never agreed to reinstate the unit to a “bare-shell” state or to allow time for reinstatement works to be completed before 30 September 2015.

156.  The two exceptions are these.  First, I do not accept the defendants’ allegation that by 18 October 2015, not only that the reinstatement works had been completed but also that the unit was being refurbished for the next tenant, a chain supermarket store.  Kin Wah had only looked from the outside on that day.  The photographs he took on that occasion are not conclusive evidence. More importantly, there was a photograph showing a poster saying that the supermarket would open on 27 November 2015.  The big time gap between 18 October and 27 November does not sit well with the defendants’ case. 

157.  Hence, I accept Wealthy Catering’s case in this regard and find as facts that it had carried out reinstatement works in the unit until 19 October 2015. Further, I find that it had incurred the reinstatement costs as alleged and suffered loss in the amounts it had paid to Appreciate for over-staying at the unit.  I do so on the strength of the invoices produced by Wealthy Catering. Although Appreciate and Wealthy Catering were related as outlined above, there has been no suggestion made in these proceedings that their dealings had not been on an arm’s length basis.  I would take the invoices produced on the reinstatement works and the rent charged by Appreciate for October 2015 to be authentic.  They are proof of the out-of-pocket sums expended by Wealthy Catering subsequent to the return of the unit by Superior Luck to Appreciate.

158.  Second, I reject the defendants’ allegation that Superior Luck had paid a sum of $74,000 as electricity deposit at the commencement of the franchise. They have produced no documentary evidence to substantiate the allegation.  The sub-franchise document and the co-operation document made no mention of such deposit.  The amount is not huge but is not negligible either.  I have observed above that the parties appeared to be most concerned with payment terms when drafting the documents.  The fact that the electricity deposit was not mentioned seems to point to it not having been paid by the defendants in the first place.

LEGAL RIGHTS AND OBLIGATIONS

159.  Based on the facts as found, I proceed to address the legal positions of the parties.

How were the contracts formed?

160.  On this issue, Mr Chai referred to the decision of the Court of Final Appeal in Bank of China (Hong Kong) Ltd v Fung Chin Kan (2002) 5 HKCFAR 515.  He submitted that in the present case, in light of the series of dealings between the parties, the proper question to ask is – what was the true bargain between them?

161.  On the facts of that case, Lord Cooke said at para 70:-

“An alternative analysis, leading to the same result, is that there was a single composite agreement, of which the legal charge was one component and the instructions another, imposing liability on the chargors in the terms detailed in the charge but limiting it to $3.3 million specified in the instructions. Perhaps this approach is a more straightforward reflection of the true bargain between the bank and the chargors. This, too, is an application of a familiar concept and is not excluded by the parol evidence rule.” (emphasis added)

162.  Litton NPJ upheld the instructions as a collateral contract to the legal charge (at paras 57-58).  But the “true bargain” approach and the “single composite agreement” conclusion reached by Lord Cooke was endorsed by Bokhary PJ, Chan PJ and Mortimer NPG (at paras 1, 10 and 68) as an alternative analysis.

163.  Applying the “true bargain” approach to the facts here, it is clear that the sub-franchise contract and the co-operation contract were made by conduct and in writing.

164.  The sequence of events was as follows.  Man and the Hos reached an oral agreement on the franchise and co-operation arrangement in September 2011.  At that time, Superior Luck and Real Stand were yet to be acquired.  The company records reveal that Wealthy Catering and Real Stand became the directors of Superior Luck only on 26 September 2011.  Because of that, strictly speaking, the orally agreed terms per se did not form part of the contracts between the three companies.  However, since 1 October 2011, the companies had in fact been operating in accordance with those orally agreed terms as if they were bound by them.  I therefore hold that by reason of the conduct of the three companies, the contracts made between them effectively incorporated those orally agreed terms.  Some time in October 2011, the parties recorded the key terms in writing in the sub-franchise document and the co-operation document. These documents formed the written part of the two contracts respectively.

165.  I therefore reject Mr But’s submission that the terms of the contracts are to be found in the two documents alone.

The licensing issue

166.  It therefore follows, and I hold, that under the sub-franchise contract, all matters concerning the licence in respect of the mahjong club business, including its application, renewal and maintenance, should be handled by Wealthy Catering solely and exclusively but that the licence fees and any insurance premium would be borne by Superior Luck. 

167.  This contractual term arose, first, from the conduct of the two companies as from 1 October 2011, which in effect carried over the oral terms agreed between Man and the Hos in the course of their negotiations; and, secondly, from the provision “並遵守牌照部一切經營方式” in clause 3 of the sub-franchise document. 

168.  I therefore reject Wealthy Catering’s contention that the provision in clause 3 should be interpreted to impose an obligation on Superior Luck to handle the renewal of the club licence. This interpretation is inconsistent with the sub-franchise contract being a single composite agreement which comprised a term to the opposite effect. 

The reinstatement issue

169.  I have found that in October 2011, when Man requested Shek Wing to execute the written documents, Man only mentioned that Appreciate was the landlord “up above” and there would be a rent adjustment during the four-year franchise period.  There was no agreement reached that all the terms in the head lease would be incorporated into the sub-franchise contract.  I have also found that Man did not hand over a copy of the head lease to Kin Wah at the time of signing.

170.  The sub-franchise document contained the following terms: “租約年期及加租條款等各項細則以欣賞有限公司與東駿易有限公司所訂的租約協定一樣”.  The question therefore is this – against the above factual background, should this express provision be construed to mean that all the terms in the head lease were to be incorporated into the sub-franchise document?  Mr But answered the question in the affirmative. If he is right, that means that Superior Luck would be under an obligation to reinstate the unit to a “bare-shell” state upon termination.

171.  The question as to whether a term is properly incorporated by reference is a matter of construction.  The task is to ascertain the parties’ intention when they entered into the contract by reference to the words they used: Astel-Peiniger Joint Venture v Argos Engineering & Heavy Industries Co Ltd [1995] 1 HKLR 300 at 311, lines 5-10, per Kaplan J.  It is necessary for it to be clear which terms are incorporated: Habas Sinai v Sometal [2010] EWHC 29 (Comm), para 48, per Christopher Clarke J.

172.  It is plain, in my view, that as a matter of construction the incorporating words used in the sub-franchise document did not have the effect of incorporating the entire head lease for the following reasons. 

(a)   First, the words specifically referred to two matters only, namely the term of the lease and the increase in the rent.  If the intention had been to incorporate the entire head lease, the drafting could have simply and easily stated so.  By making an express reference to the two matters, the intention seemed to have been to incorporate those terms relating to the two matters only.

(b)   Secondly, it is true that the word “等” (etc) was used.  But a plain reading of the provision would suggest that if other terms in the head lease were to be incorporated by the use of “etc”, those other terms must somehow be related to or have something to do with the two express matters.  Such other terms would not include the reinstatement obligation which was related to neither the length of the contractual term nor the rent increase.

(c)   Thirdly, when the provision is considered against the factual background as outlined above, namely the discussion of Appreciate being the landlord “up above” and the upcoming rent adjustment, it is clear that the provision should be construed to mean only terms relating to the two express matters.

173.  Accordingly, I reject Mr But’s submission that the entire head lease was incorporated into the sub-franchise document.  Under the contract, Superior Luck was not under any obligation to reinstate the unit to a “bare-shell” state upon termination of the franchise.

The deposit issue

174.  I shall deal with the rental deposit ($100,000) and the security money ($500,000) paid by Real Stand to Wealthy Catering together and then, separately, the further rental deposit ($152,000) paid by Superior Luck to Appreciate, as they involve discrete issues.

175.  In respect of the rental deposit and the security money, as already pointed out, the sub-franchise document and the co-operation document were in conflict with each other.  The former provided that the sums were paid by Superior Luck whereas the latter Real Stand. 

176.  How should that conflict be resolved?  It is ultimately a matter of construction of the two contracts.

177.  The special feature here is that we are faced with two directly contradictory provisions.  The question is – which one should prevail?  What objective intention should the court attribute to the parties?  In a case like the present one, context is all important. 

178.  In Fully Profit (Asia) Ltd v Secretary for Justice (2013) 16 HKCFAR 351, Ma CJ said, at para 15:-

“It is in my view not particularly helpful in most cases to refer to the “ordinary and natural meaning” of words because, as very often experience tells us, there can be much debate over exactly what is the ordinary or natural meaning of words.  The surer guide to interpretation is context.” (emphasis added)

179.  In a commercial context, where there are two possible constructions, the court is entitled to prefer the construction which is most consistent with business common sense and most likely to give effect to the commercial purpose of the agreement and to reject the other: Rainy Sky SA v Kookmin Bank [2011] 1 WLR 2900, paras 15, 21, 25, 30, 40 and 43, per Lord Clarke.  It has been said that where the drafting was of a poor quality or of an informal nature, the correct interpretation of the contract may be achieved by a greater emphasis on the factual matrix when giving effect to the language used: Rainy Sky at para 26; Wood v Capita Insurance Services Ltd [2017] AC 1173, at para 13.  The factual matrix would include the nature and purpose of the commercial bargain.

180.  Applying the above principles, it seems to me that it would accord more with business common sense and the purpose of the commercial bargain that the rental deposit and the security money is treated as paid by Superior Luck.  The reason is simply this.  The bargain had all along been that Superior Luck was the operating company running the club business whereas Real Stand was not. It was an investor holding a 70% stake in the club.  The payment of the rental deposit and the security money was part of the terms on which Superior Luck was to take over the lease and the franchise.  

181.  I therefore hold that clauses 1(c) and 4 of the sub-franchise document prevail over clauses 3 and 4 of the co-operation document.  Accordingly, the two sums should prima facie be repayable to Superior Luck, and not Real Stand, upon termination, subject to any right of Wealthy Catering to deduct or withhold it under the sub-franchise contract.

182.  In respect of the further rental deposit, the situation is different. There was a written agreement signed between Appreciate and Superior Luck. Wealthy Catering was not a party to it.  In cross-examination, Shek Wing said that he did not handle the further rental deposit and did not know why Superior Luck would sign the agreement directly with Appreciate.  The purpose of the further rental deposit is however clear.  It is to make up the rental deposit upon the increase in the rent in the second year of the franchise.  Mr Chai invited the court to take into account the commercial purpose behind the payment and hold that Wealthy Catering was the receiving party of the sum and hence it should return it to Superior Luck upon termination. 

183.  I am unable to accept this submission.  This interpretation goes contrary to the express wording in the agreement between Appreciate and Superior Luck, which provided that Superior Luck was obliged to make payment to Appreciate in instalments.  The agreement itself raises some issues. Appreciate was referred to as the “lessor” and Superior Luck the “lessee”.  Furthermore the increase in rent took effect in October 2012.  The first instalment payable under the agreement was scheduled to be in May 2013.  Why was there a big time gap?  Why was the sum paid in instalments instead of by a lump sum?  These issues were not explored at the trial.  And hence the exact purpose of the agreement is unclear.  It does seem to be the case that there was other factual background which had given rise to the agreement but which has not been revealed in the evidence.  

184.  In the circumstances, I hold that notwithstanding that the further rental deposit was paid consequent upon the increase in the rent under the sub-franchise contract, the express words in the agreement should be given effect and the sum is to be taken as paid by Superior Luck to Appreciate.  Hence Wealthy Catering is under no obligation to return this sum upon termination of the sub-franchise.

How were the contracts were terminated?

185.  Given that Wealthy Catering failed to take steps to ensure that the licence would be renewed upon its expiry in July 2015 or shortly afterwards, it was in breach of the sub-franchise contract.  Given the nature and purpose of that contract, I do not think there can be any serious dispute that the breach was of a repudiatory nature.  I further hold that the repudiatory breach was accepted by Superior Luck on 30 September 2015 by its letter of the same date. The contract was thus terminated on that day.  (In the bottom margin of that letter, there was a fax stamp stating the date of 1 October 2015 but no fax number appeared.  It is therefore unclear what to make of the date stamp.)

Wealthy Catering’s claims

186.  In closing, Superior Luck accepted that the rent for September 2015 was due and owing to Wealthy Catering.

187.  As regards the claim for electricity charges for that month, I hold that Superior Luck was also liable for the amount stated in the electricity bill issued on 2 October 2015. 

188.  Mr Chai argued that given the electricity bill was issued after the termination of the contract, Superior Luck was discharged from the obligation to settle the bill under the contract.  No cause of action in respect of the electricity charges can therefore arise against Superior Luck.  In any event “there could not be a duty to pay before the amount was known”.  This argument is plainly untenable.  The objective fact is that electricity was consumed by Superior Luck during the month and under the sub-franchise contract, it was obliged to settle the bill.  The cause of action had arisen prior to the termination though the charges were not yet known. 

189.  Lastly, the reinstatement claim must fail given my ruling that Superior Luck was not under any contractual obligation to reinstate the unit to a “bare-shell” state in the first place.

190.  In summary, Superior Luck is liable to pay to Wealthy Catering a total sum of $229,659.  Wealthy Catering should apply the rental deposit of $100,000 towards the outstanding sum.  That still leaves $129,659 which should then be offset against the security money of $500,000, leaving a balance of $370,341 in the hands of Wealthy Catering.

191.  The question then becomes whether Wealthy Catering is obliged to return the balance of the security money to Superior Luck.  This turns on the construction of clause 4 of the sub-franchise document.  And the resolution would determine the counterclaim raised by Superior Luck.

Superior Luck’s counterclaim

192.  On the construction, Superior Luck’s position is straightforward.  As of 30 September 2015, ie the date on which the contract was terminated for repudiation, the rent had not been outstanding for 30 days.  Hence, the condition specified in clause 4 was not fulfilled and the right to forfeit the security money had not accrued.  Therefore Wealthy Catering is now obliged to return the balance to Superior Luck.

193.  On the other hand, Mr But argued:-

“For the Security Deposit, notwithstanding P could only exercise its right to forfeit after 30 days later (i.e. on or after 5^th October 2015), the entitlement to forfeit the Security Deposit has already been unconditionally acquired and “accrued” from the date of non-payment (i.e. 5^th September 2015) and/or purported termination by D1 (1^st October 2015) under the effect of Clause 4.”

194.  I am not able to accept Mr But’s submission that on 5 September 2015, the right to forfeit had already accrued because that directly contradicts the express wording in the clause.

195.  Instead I consider that the proper question is this – did the 30-day period cease to run on 30 September 2015 when the contract was terminated?  Mr Chai did not directly address this issue but it is implicit in his submissions that he thought so.  If it ceased to run on 30 September 2015, the condition for forfeiture was not (and would never be) fulfilled and Wealthy Catering cannot invoke the clause to forfeit the balance of the security money.  If time did not cease to run, as the rent remains outstanding to this day, the condition has been fulfilled and the security money is forfeitable.

196.  In a way, the issue resembles a more familiar question which arises from time to time when a contract is terminated by the innocent party accepting a repudiatory breach.  That is, does a particular contractual term survive the termination of the contract? This ultimately turns on the construction of the contract. The task is, as usual, to ascertain the intention of the parties.  In a commercial context, the court should have particular regard to business common sense and the purpose and function of the provision in question.  See, eg, Anson’s Law of Contract 30^th ed at p554:

“The primary obligations of the party in default are then replaced by a secondary obligation to pay compensation to the injured party for the breach. Note, however, certain primary obligations will survive discharge and continue to be enforceable. The continued enforcement of such obligations simply reflects the presumed intention of the parties. The best examples of obligations that survive are arbitration clauses and dispute resolution mechanisms.” (emphasis added)

197.  For an illustration of how the courts deduce the objective intention of the parties on whether a clause should survive termination for repudiatory breach by reference to the commercial purpose of the clause, see, eg, Heyman v Darwins Ltd [1942] AC 356 at 374 (an arbitration clause survived termination, as although the purpose of the contract had failed, the clause was not one of the purposes of the contract); see also, Yasuda Fire & Marine Insurance Co of Europe Ltd v Orion Marine Insurance Underwriting Agency Ltd [1995] QB 174 at 187D-G, 191B (a records inspection clause was held to survive termination, its function being wholly ancillary to the subject matter of the agreement).

198.  Here, in my view, clause 4 of the sub-franchise document is to be construed in the following commercial context:-

(a)   The scheduled term of the franchise was for a fixed period of four years.

(b)   Save where clause 4 applied and subject to the operation of general contractual principles, there was no “exit” or “early termination” clause which was exercisable by either party.

(c)   But where either of the two conditions specified in clause 4 was fulfilled, Wealthy Catering was given an option to forfeit the security money and take back the operating right, thereby effectively bringing the contract to an end.

199.  Against this context, it would appear that the purpose of clause 4 was to afford some protection to Wealthy Catering by giving it an option to “exit” the contract in the specified circumstances.  In theory, it could choose only to forfeit the security money but not terminate the contract or vice versa. However, when clause 4 is considered as a whole, it seems to me that its clear and overall purpose is to give an option to Wealthy Catering to get out of the contract.  This presupposes that the contract should be in existence when Wealthy Catering purported to exercise that option.  If the contract had already been terminated, there would be nothing for Wealthy Catering to terminate.

200.  Furthermore, the language made it clear that a default in paying rent when due did not immediately give Wealthy Catering that option.  A grace period of 30 days was provided for.  If Superior Luck settled the outstanding rent within the grace period, Wealthy Catering would not acquire the right to forfeit and terminate in the first place.  Hence, it can be said that the purpose of the grace period is to allow room for Superior Luck to make good its default so as to keep the contract alive or, to put it in another way, to “save” the contract.  It must therefore follow that the grace period would only run if the contract was still alive.  This is because if there was no longer a contract (because, eg, it had been terminated for a repudiatory breach), there was nothing to be “saved”.  The purpose of the grace period lapsed upon the termination of the contract.

201.  I therefore hold that as a matter of construction, the 30-day period in clause 4 ceased to run on 30 September 2015 when the repudiatory breach committed by Wealthy Catering was accepted by Superior Luck.  It follows that the right to forfeit the security money had not accrued.  Wealthy Catering is now obliged to return the balance of the security money to Superior Luck.

202.  I would add, by way of footnote, that my analysis would also mean that even if the sub-franchise contract had come to an end as scheduled in the absence of any repudiatory breach, where Superior Luck had failed to pay the September rent by that date, Wealthy Catering could not hold on to the security money until 4 October 2015 (ie when the 30-day period expired) and then seek to invoke clause 4 to forfeit the whole of the security money.  It would have to return the security money subject to the deduction of the outstanding rent upon expiry of the term.  I think that makes commercial sense and accords with the purpose of the clause.  Upon expiry, the purpose lapsed as there was no longer any need for Wealthy Catering to “early exit” the contract.

203.  Give my ruling that the right to forfeit had not accrued, there is no need to deal with Mr Chai’s alternative submission that clause 4 should be regarded as a liquidated damages clause.  

Real Stand’s counterclaim

204.  Lastly, given my rulings in paras 181 and 184 above, Real Stand’s counterclaim for the return of the deposits must fail. 

CONCLUSION

205.  In conclusion, Superior Luck owes to Wealthy Catering a total sum of $229,659, comprising the rent and electricity charges for September 2015.  At the same time, Wealthy Catering should return to Superior Luck a total sum of $600,000, comprising the rental deposit and the security money.  Upon set-off between the two sums, Wealthy Catering should pay a net sum of $370,341 to Superior Luck.  Accordingly, I order that Wealthy Catering’s claim against Superior Luck be dismissed and there be judgment in favour of Superior Luck on its counterclaim in the sum of $370,341.  The sum would carry interest at the rate of 1% above prime rate from 1 October 2015 until judgment.

206.  Real Stand’s counterclaim against Wealthy Catering is dismissed.

207.  I also make the following nisi costs orders:-

(a)   Before consolidation, Wealthy Catering do pay Superior Luck’s costs of the action and the counterclaim in DCCJ 5075/2015 and Real Stand do pay Wealthy Catering’s costs of the action in DCCJ 5628/2015.

(b)   After consolidation, Wealthy Catering do pay both defendants’ costs of the action and the counterclaim in the consolidated action, to be taxed if not agreed, with certificate for counsel.  Although Real Stand’s counterclaim is dismissed, it has been fought on the same factual basis as Superior Luck’s which has largely been accepted by me.